- Person
- Kenneth Arrow
- Lived
- 1921–2017
- Field
- Economics
- From
- American
The story
In December 1963 the American Economic Review published Kenneth Arrow's paper "Uncertainty and the Welfare Economics of Medical Care." Arrow was then a professor at Stanford and had recently served on the staff of the President's Council of Economic Advisers. At the time, few economists studied health care as its own subject. Arrow asked why medicine and medical insurance are organised so differently from ordinary markets.
His answer centred on information. Patients usually know far less than doctors about their illness and treatment, and no one knows in advance who will fall sick or how badly. Arrow showed that these gaps, now called information asymmetry, help explain features such as professional licensing, the ethics expected of doctors, non-profit hospitals and the special role of insurance. Where one side of a transaction knows much more than the other, trust and institutions take the place that simple price competition plays in other markets. He concluded that ordinary free-market rules do not fit health care well.
The paper became one of the founding texts of health economics and of the wider economics of information. Later researchers applied the same insight to second-hand goods, online auctions and insurance of every kind, explaining why markets with unequal information depend on devices such as warranties and independent certification. Arrow himself described much of his career as the study of information as an economic variable, from how it is produced to how it is used.
He also put the ideas to practical use. Elected to the Institute of Medicine, he chaired two of its study committees, most recently one on the economics of antimalarial drugs, whose 2004 report called for a global subsidy to make effective treatment affordable. In 2010 he joined a friend-of-the-court brief supporting the Affordable Care Act when it was challenged in court.
A New York Times profile from 1972 described him as a humanist who tried to apply fundamental theory to social problems, and medical care was the first on its list. His paper remains a starting point for researchers studying how to design insurance, pay doctors and regulate health care.
Why it matters
Arrow's analysis still shapes how governments and insurers design health systems, from insurance rules to the regulation of medical professions.
About Kenneth Arrow
Economist whose impossibility theorem, general-equilibrium proofs and work on risk, information and health care reshaped economics; still the youngest winner of the Nobel economics prize.
More about Kenneth Arrow
- Kenneth Arrow and Gérard Debreu proved markets can balanceIn 1954 Kenneth Arrow and Gérard Debreu published the first rigorous proof that a competitive economy can have a set of prices at which every market clears.
- Kenneth Arrow proved no voting system is perfectKenneth Arrow's 1951 book Social Choice and Individual Values introduced his impossibility theorem and founded modern social choice theory.
- Kenneth Arrow showed how learning by doing drives growthKenneth Arrow's 1962 papers on learning by doing and on markets for invention helped economists explain where innovation and growth come from.
- Kenneth Arrow helped create Stanford's operations researchKenneth Arrow co-wrote a 1951 classic on optimal inventory policy and helped establish Stanford's operations research department in the early 1960s.
- Kenneth Arrow used the winds to save wartime fuelAs a US Army Air Forces weather officer in the Second World War, Kenneth Arrow worked out flight paths that used prevailing winds to cut fuel use.
- Kenneth Arrow made the case for affordable malaria drugsIn 2004 Kenneth Arrow chaired an Institute of Medicine committee that called for a global subsidy so that effective malaria drugs could reach the world's poor.
Sources
- Kenneth J. Arrow: Biographical NobelPrize.org
- Kenneth Arrow, youngest to win Nobel for economics, dies at 95 Bangor Daily News
- Kenneth Arrow Wikipedia
Another act of tikkun olam. This is part of tikkun olam, the Jewish idea of repairing the world, and every one of us can add to it.